Mike Lipper’s Monday Morning Musings
Bad Comparisons Can Lead
To Faulty Conclusions
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Your Portfolio vs. Stock Indices
The biggest trap the media and sales community set for both
institutions and individual investors is comparing portfolio performance with a
stock index constructed by a publisher. The best US stock market index is probably
the S&P 500 Composite (SWX is its symbol).
The index is published by Standard & Poor’s Global (*),
whose components are selected by data analyst editors, not investment managers.
In a performance year where a company splits into two or more publicly traded
stocks; the index carries each component of the former stock for the
performance year. That is why the SWX measures slightly more than 500 stocks at
times. Additionally, almost every active investor’s portfolio contains some
cash or similar instrument. In periods of large gains or losses, the
performance of non-equities will affect the performance of an account, but not
the index. Furthermore, it is extremely rare for an active portfolio to own
anywhere close to 500 names.
(*) Owned in client and personal accounts
In measuring the performance of the SWX, the measurement compares
the closing trade price of the prior trade date to the ending price of the
current day. It is extremely common for the ending price to be higher or lower than
what an investor receives, so the actual performance of an active account is
likely to be different than an end price calculation.
The management committee of the Wall Street Journal and the Standard
& Poor’s editors have decided that SWX will only contain stocks that are
listed on US stock exchanges. They also do not limit the percentage size of
holdings in the composite, while the SEC limits diversified mutual funds to holding
no more than 5% weighting within the portfolio of any given stock at cost (not
market). Non-diversified funds are not restricted this way.
In today’s world, managed accounts are almost certain to
hold cash or fixed income instruments as redemption reserves. Additionally,
opportunity reserves will in many cases include non-US listed securities.
Many years ago, for these reasons, we convinced a number of
outside directors of mutual funds to compare the performance of their funds to
similar portfolios of funds. I believe this is the way almost all investment
accounts should be measured, whether they are funds or not.
Other Mis-labeling
Last week, three of the five leading large-cap stocks were
labeled financials; JP Morgan Chase (*), Morgan Stanley(*), and American
Express(*). None of the articles I read mentioned that Charles Schwab(*) was
the fourth largest declining large stock on Friday. Clearly, Schwab has something
else going on that the first three do not, despite sharing the same industry
label.
(*) Client or personally owned
Also last week, there was no mention of various countries
whose local market indices showed gains, Europe 6 and Asia 12.
Another example of incomplete labeling was a headline of Goldman
predicting that “Gold will hit close to $5000, if Trump undermines the Fed”.
Perhaps true, but other commodities and some foreign stocks may do just as
well. (Coincidently, a strategic collaboration between Goldman and T. Rowe
Price to create a range of public and private investments was also announced. As
a part of this collaboration, Goldman will invest $1 billion in open market
purchases of T. Rowe Price stock. Perhaps the more important message, is that
Goldman believes the market is not offing enough diversity.)
Question: What are your thoughts?
Did you miss my blog last week? Click here to read.
Mike
Lipper's Blog: What We Should Have Been Watching? - Weekly Blog # 903
Mike
Lipper's Blog: The Week That Wasn't - Weekly Blog # 902
Mike
Lipper's Blog: DIFFERENT IMPLICATIONS: DATA VS. TEXT - Weekly Blog # 901
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